Why Shippers Should Care About Total Landed Costs

July 15, 2009 | Steve W. Martin

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The unprecedented economic downturn, combined with the very unpredictable changes in key supply chain variables over the last few years, shows why shippers should take a more holistic approach when making network configuration decisions. The dramatic spike in fuel prices last year serves a perfect example. The fuel ≥crisis≤ was a catalyst that forced companies to reevaluate their supply chain footprint. However, in what has proved to be a highly volatile global economy, creating a network design based on just that one factor was like betting the odds.

There are many factors that impact the effectiveness and efficiency of a supply chain. Companies must take a number of quantitative and qualitative risks into consideration. Because these factors and risks can be a moving target, companies looking to be competitive in todayπs marketplace need to consider the Total Landed Cost of goods when making supply chain decisions.

Total Landed Cost of a product incorporates all the costs incurred within the supply chain in order to make the product available for consumption. This includes but is not limited to manufacturing and sourcing costs, transportation, inventory, trade costs, and risk of disruptions, among others. The impact of changes in one or more of these factors can have a significant impact on the total cost of the product, and consequentially, the best way to configure a supply chain to bring that product to market.

In addition to some of the more obvious costs mentioned above, costs associated with quality, insurance, duties and taxes, expedites, deconsolidation, and rework or returns, all impact the total cost of a product. By understanding and assigning costs associated with the various components of a supply chain, a company can determine optimal sourcing locations, optimize networks, identify high cost aspects of its supply chain, and perform ≥what if≤ scenarios and risk analysis.

The value of Total Landed Cost analytics allows businesses to model before they cut costs by truly optimizing their supply chain according to real market conditions, ultimately reducing working capital and improving cash flow.

Letπs take a look at how understanding Total Landed Cost impacts a decision to source in Mexico versus China. With a narrow view, the production costs from a vendor in China look significantly better than costs from Mexico. But once we factor in other variables such as the cost of inventory in transit, transportation, duties, and fuel, the Total Landed Cost of a product sourced in Mexico becomes clearly more attractive.

Being able to determine the true Total Landed Cost requires a significant amount of data, from across various functions in an organization≠so this kind of analysis also becomes an exercise in teamwork that demands visibility beyond just the supply chain function.

The Total Landed Costs analysis strengthens the supply chain decision support process, by allowing companies to develop trade flow simulations that give visibility into the impact of making one supply chain decision over another. Ultimately, armed with this information, a business will have the coveted flexibility in their supply chain to adjust quickly to market realities and improve shareholder value.